Answer Choices:
a. The yield curve should be downward sloping, with the rate on a 1-year bond at 6%.
b. The interest rate today on a 2-year bond should be approximately 6%.
c. The interest rate today on a 2-year bond should be approximately 7%.
d. The interest rate today on a 3-year bond should be approximately 7%.
e. The interest rate today on a 3-year bond should be approximately 8%.
Answer: c. The interest rate today on a 2-year bond should be approximately 7%.
Question: As a general rule, a company’s debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured. a. True b. False
Answer Choices:
a. True
b. False
Answer: a. True
Question: Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.
Answer Choices:
a. True
b. False
Answer: a. True
Question: A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?
Answer Choices:
a. The bond’s coupon rate exceeds its current yield.
b. The bond’s current yield exceeds its yield to maturity.
c. The bond’s yield to maturity is greater than its coupon rate.
d. The bond’s current yield is equal to its coupon rate.
e. If the yield to maturity stays constant until the bond matures, the bond’s price will remain at $850.
Answer: c. True
Question: A bond trader observes the following information: The Treasury yield curve is downward sloping. Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds. Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields. On the basis of this information, which of the following statements is most CORRECT?
Answer Choices:
a. A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.
b. A 10-year Treasury bond must have a higher yield than a 10-year corporate bond.
c. A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.
d. The corporate yield curve must be flat.
e. Since the Treasury yield curve is downward sloping, the corporate yield curve must also be downward sloping.
Answer: c. A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.
Question: If the required rate of return on a bond (rd) is greater than its coupon interest rate and will remain above that rate, then the market value of the bond will always be below its par value until the bond matures, at which time its market value will equal its par value. (Accrued interest between interest payment dates should not be considered when answering this question.)
Answer Choices:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
Answer Choices:
a. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of their coupon rates.
b. All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
c. All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
d. If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less than its maturity value.
e. If a bond’s yield to maturity exceeds its coupon rate, the bond’s current yield must be less than its coupon rate.
Answer: d. True
Question: Assuming that the term structure of interest rates is determined as posited by the pure expectations theory, which of the following statements is CORRECT?
Answer Choices:
a. In an equilibrium, long-term rates must be equal to short-term rates.
b. An upward-sloping yield curve implies that future short-term rates are expected to decline.
c. The maturity risk premium is assumed to be zero.
Answer: c. The maturity risk premium is assumed to be zero.
Question: If the pure expectations theory is correct (that is, the maturity risk premium is zero), which of the following is CORRECT?
Answer Choices:
a. An upward-sloping Treasury yield curve means that the market expects interest rates to decline in the future.
b. A 5-year T-bond would always yield less than a 10-year T-bond.
c. The yield curve for corporate bonds may be upward sloping even if the Treasury yield curve is flat.
d. The yield curve for stocks must be above that for bonds, but both yield curves must have the same slope.
e. If the maturity risk premium is zero for Treasury bonds, then it must be negative for corporate bonds.
Answer: c. The yield curve for corporate bonds may be upward sloping even if the Treasury yield curve is flat.
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Even if the pure expectations theory is correct, there might at times be an inverted Treasury yield curve.
b. If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
c. The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.
d. Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve cannot become inverted.
e. The most likely explanation for an inverted yield curve is that investors expect inflation to increase in the future.
Answer: a. Even if the pure expectations theory is correct, there might at times be an inverted Treasury yield curve.
Question: The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond’s remaining maturity.
Answer Choices:
True
False
Answer: a. True
Question: An investor is considering buying one of two 10-year, $1,000 face value, noncallable bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, and the YTM is expected to remain constant for the next 10 years. Which of the following statements is CORRECT?
Answer Choices:
a. Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.
b. One year from now, Bond A’s price will be higher than it is today.
Answer: b. True
Question: Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?
Answer Choices:
a. Because of the call premium, the required rate of return would decline.
b. There is no reason to expect a change in the required rate of return.
c. The required rate of return would decline because the bond would then be less risky to a bondholder.
d. The required rate of return would increase because the bond would then be more risky to a bondholder.
e. It is impossible to say without more information.
Answer: d. True
Question: A bond that had a 20-year original maturity with 1 year left to maturity has more price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.) a. True b. False
Answer Choices:
a. True
b. False
Answer: b. False